Friday, April 13, 2018

The swamp is a huge drag on us all

Matt Ridley

While the world economy continues to grow at more than 3 per cent a year, mature economies, from Europe to Japan, are coagulating, unable to push economic growth above sluggish. The reason is that we have more and more vested interests against innovation in the private as well as the public sector.

Continuing prosperity depends on enough people putting money and effort into what the economist Joseph Schumpeter called creative destruction. The normal state of human affairs is what The jurist Sir Henry Maine called a “status” society, in which income is assigned to individuals by authority. The shift to a “contract” society, in which people negotiate their own rewards, was an aberration and it’s fading. I am writing this from Amsterdam and am reminded we caught the idea off the Dutch, whose impudent prosperity so annoyed the ultimate status king, Louis XIV.

In most western economies, it is once again more rewarding to invest your time and effort in extracting nuggets of status wealth, rather than creating new contract wealth, and it has got worse since the great recession, as zombie firms kept alive by low interest rates prevent the recycling of capital into new ideas. A new book by two economists, Brink Lindsey and Steven Teles, called The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, argues that “rent-seeking” behaviour — the technical term for extracting nuggets — explains the slow growth and rising inequality in the US.

They make the case that, in four areas, there is ever more opportunity to live off “rents” from artificial scarcity created by government regulation: financial services, intellectual property, occupational licensing and land use planning: “The rents enjoyed through government favouritism not only misallocate resources in the short term but they also discourage dynamism and growth over the long term.”

Here, too, hidden subsidies ensure that financial services are a lucrative closed shop; patents and copyrights reward the entertainment and pharmaceutical industries with monopolies known as blockbusters; occupational licensing gives those with requisite letters after their name ever more monopoly earning power; and planning laws drive up the prices of properties. Such rent seeking redistributes wealth regressively — that is to say, upwards — by creating barriers to entry and rewarding the haves at the expense of the have-nots. True, the tax and benefit system then redistributes income back downwards just enough to prevent post-tax income inequality from rising. But government is taking back from the rich in tax that which it has given to them in monopoly.

As an author, my future grandchildren will earn (modest) royalties from my books thanks to lobbying by American corporations to extend copyright to an absurd 70 years after I am dead. Yet there is no evidence that patents and copyrights incentivise innovation, except in a very few cases. Indeed, say Lindsey and Teles, the evidence suggests that “rents that now accrue to movie studios, record companies, software producers, pharmaceutical firms, and other [intellectual property] holders amount to a significant drag on innovation and growth, the very opposite of IP law’s stated purpose.”

[Thomas Babington Macaulay MP summarised an early attempt to extend copyright in a debate thus: "The principle of copyright is this. It is a tax on readers for the purpose of giving a bounty to writers. The tax is an exceedingly bad one; it is a tax on one of the most innocent and most salutary of human pleasures; and never let us forget, that a tax on innocent pleasures is a premium on vicious pleasures." A correspondent sends me the following details of this appalling saga: "Someone noted that there is a divergence in copyright term in the European Union.

All the then member states protect works for the life of the author plus fifty years while West Germany alone protects works for the life of the author plus seventy years. Immediately the copyright publishers suggested this as something in need of harmonisation. But instead of harmonising down to the norm, all the member states were lobbied to harmonise up to the unique German standard. As a result, Adolf Hitler's "Mein Kampf" which was going out of copyright in 1995 was suddenly revived and protected as a copyrighted work throughout the European Union.

Gilbert and Sullivan operettas whose copyright had been controlled by the stultifying hand of the D'Oyly Carte Opera Company found themselves in a position to once again stop anyone else performing Gilbert and Sullivan works or creating anything based upon them. It is not surprising that, following a brief flowering of new creativity when the Gilbert and Sullivan copyrights initially expired (e.g. Joseph Papp's production of Pirates on Broadway and the West End stage), since their revival by the European Union harmonisation legislation their use have become effectively moribund. A generation of young people are growing up without knowing anything about Gilbert and Sullivan - an art form which, it can be argued, gave birth to the modern American and British musical theatre."]

As for occupational licensing, Professor Len Shackleton of the University of Buckingham argues that it is mostly a racket to exploit consumers. After centuries of farriers shoeing horses, uniquely in Europe in 1975 a private members bill gave the Farriers Registration Council the right to prosecute those who shod horses without its qualification.

Then there are energy prices. Lobbying by renewable energy interests has resulted in a system in which hefty additions are made to people’s energy bills to reward investors in wind, solar and even carbon dioxide-belching biomass plants. The rewards go mostly to the rich; the costs fall disproportionately on the poor, for whom energy bills are a big part of their budgets.

An example of how crony capitalism stifles innovation: Dyson found that the EU energy levels standards for vacuum cleaners were rigged in favour of German manufacturers. The European courts rebuffed Dyson’s attempts to challenge the rules, but Dyson won on appeal and then used freedom of information requests to uncover examples of correspondence between a group of German manufacturers and the EU, while representations by European consumer groups were ignored.

So deeply have most businesses become embedded in government cronyism that it is hard to draw the line between private, public and charitable entities these days. Is BAE Systems or Carillion really a private enterprise any more than Oxford University, Oxfam, Oxfordshire county council or the NHS? All are heavily dependent on government contracts, favours or subsidies; all are closely regulated; all have well-paid senior managers extracting rent with little risk, and thickets of middle-ranking bureaucrats incentivised to resist change. Disruptive start-ups are rare as pandas; the vast majority work for corporate brontosaurs.

Capitalism and the free market are opposites, not synonyms. Some in the Tory party grasp this. Launching Freer, a new initiative to remind the party of the importance of freedom, two new MPs, Luke Graham and Lee Rowley, not only lambast fossilised socialism and anachronistic unions, but also boardrooms “peppered with oligarchical and monopolist cartels”.

One of the most insightful books of recent years was The Innovation Illusion by Fredrik Erixon and Bj√∂rn Weigel, which argues that big companies increasingly spend their profits not on innovation but on share buybacks and other “rents”. Far from swashbuckling enterprise, much big business is “increasingly hesitant to invest and innovate”. Like Kodak and Nokia they resist having to reinvent themselves even unto death. Microsoft “was too afraid of destroying the value of Windows” to go where software was heading.

As a result, globalisation, far from being a spur to change, is an increasingly conservative force. “In several sectors, the growing influence of large and global firms has increasingly had the effect of slowing down market dynamism and reducing the spirit of corporate experimentation”.

The real cause of Trump-Brexit disaffection is not too much change, but too little. We need to “radically reduce the restrictive effect of precautionary regulation” and promote a new regulatory culture based on permissionless innovation, Erixon and Weigel say. “Western economies have developed a near obsession with precautions that simply cannot be married to a culture of experimentation”. Amen.



Trump Signs Executive Order Pushing Work for Welfare

President Donald Trump signed an executive order Tuesday that aims to add and strengthen work requirements for public assistance and other welfare programs.

The order, signed in private, promotes "common-sense reforms" that policy adviser Andrew Bremberg said would reduce dependence on government programs.

"Part of President Trump's effort to create a booming American economy includes moving Americans from welfare to work and supporting and encouraging others to support common-sense reforms that restore American prosperity and help them reclaim their independence," he said.

The order focuses on looking for ways to strengthen existing work requirements and exploring new requirements for benefits such as food stamps, cash and housing assistance programs.

Trump has long accused beneficiaries of abusing government assistance programs and has claimed many who have no intention of working make more in benefits than those with jobs.

"I know people that work three jobs and they live next to somebody who doesn't work at all. And the person who is not working at all and has no intention of working at all is making more money and doing better than the person that's working his and her ass off," Trump said in November. During the campaign, he pledged that, under a Trump administration, families "trapped in welfare" would be "provided with jobs and opportunity."

Most people who use the Supplemental Nutrition Assistance Program, or SNAP, who are able to hold jobs do work, but they don't earn enough to pay for food and cover other expenses. According to 2015 data from the Department of Agriculture, 44 percent of the total households using the SNAP program had someone in the family earning money.

The administration has made several moves pushing work for Medicaid recipients and those who use the SNAP program.

In January, officials announced that states would be able to impose work requirements for Medicaid. And they've proposed tightening the existing requirement that able-bodied adults who want to receive SNAP benefits for more than three months at a time must work in some capacity.

The proposal would raise the age limit for recipients who are exempt from the requirement and restrict the ability of states to offer waivers. The Department of Agriculture has been soliciting public comment on the issue.

The administration has also been exploring more stringent work requirements for those who receive assistance under the Temporary Assistance for Needy Families program, as well as minimum weekly work hours for those who receive housing assistance.

The order gives various Cabinet secretaries 90 days to review the programs their agencies offer, and recommend possible changes.

Advocates argue that, while encouraging people to work is fundamentally a good thing, imposing strict requirements on already vulnerable populations, particularly when coupled with an aggressive effort to slash funding and shrink public assistance programs, could be disastrous for those in need.

Such requirements could have dire consequences for those already experiencing barriers to finding, and keeping, a job, including single mothers who can't afford child care, people who lack access to transportation and those who suffer from mental illness.

Rebecca Vallas, vice president of the Poverty to Prosperity Program at the Center for American Progress, said Trump's executive order served to reinforce myths about poverty in the U.S.

"By using dog-whistle terms like 'welfare,' Trump's trying to paint people who turn to Medicaid, SNAP, and other public programs as Reagan's mythical 'welfare queen' -- so we don't notice that he's coming after the entire working and middle class," Vallas tweeted.

The White House had once identified overhauling the welfare system as one of its top two legislative priorities for 2018, along with a major investment in infrastructure. But GOP leaders, including Senate Majority Leader Mitch McConnell, told the president there was little chance of passing anything that needs Democrats' votes.

Trump appeared to agree as he huddled with GOP leaders at the Camp David presidential retreat in January.

"It's a subject that's very dear to our heart," Trump said then. "We'll try and do something in a bipartisan way. Otherwise, we'll be holding it for a little bit later."



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